Refunds, New Supply Occupy Gov. Davis

California sailed through the last week of June free of blackouts and power alerts as the projections of controlled outages were on the decline as state officials focused on possible refunds through the federal settlement negotiations now ongoing and new power supply projects coming on line in the nick of time.

While earlier projections called for more than 130 hours of power blackouts this summer in California, now that summer has arrived, everyone was reducing those estimated last week. Sempra Energy CEO Steve Baum used 113 hours and said it was reduced; UCLA economic forecasters used 36 hours, along with another 112 hours of shutoffs of interruptible business customers, but the Cambridge Energy Research Associates in some related analysis used only 20 hours of blackouts.

A senior economist with the state Legislative Analysts' Office noted that wholesale prices were dampening, consumers conservation was having an impact, and the state can probably expect fewer controlled outages. In back of the past two week's of good fortune have been relatively mild weather statewide and no major unexpected outages of large power sources.

Despite mounting pressures from public opinion polls, economic analyses and continued inaction in the state legislature, Gov. Gray Davis passed the mid-year without a final state budget (its deadline was last Saturday) but renewed optimism on the energy front with recent Federal Energy Regulatory Commission initiatives appearing to appease the governor more than at any time during the 12-month crisis. Davis goes to a ceremonial start-up of a second new generation plant today--Calpine Corp.'s 540-MW Sutter plant in Yuba City, about 50 miles north of the state capital.

As the new plants come on line and prices continue to moderate, Davis's people are circulating supportive remarks from Federal Reserve Chairman Alan Greenspan in a speech last Thursday to the Economic Club of Chicago, advocating price caps to help solve California's problems, and noting that things appeared to be getting better for the state.

Last week California's governor expressed hope for a joint state-federal power plant inspection programs, as well as increased data sharing between state and federal regulators, following his 90-minute meeting with the two newest FERC commissioners, Patrick Wood and Nora Brownell, in Sacramento. He called the talks "both construction and informative."

"From my conversations with these Commissioners, it appears that FERC may finally be poised to do its job controlling energy costs," Davis said in a prepared statement, but not letting up all week in his contention that refunding $8.9 billion in overcharges continues to be his "top priority."

The governor wrote in a June 22 letter to the administrative law judge handling the settlement talks to emphasize that California's delegation to the talks has only one issue on its agenda --- refunds. "The success of this settlement conference hinges on cooperation from generators who have been gouging Californians for the past year," Davis said. "I will be vigilant in insisting that Californians get their money back."

In a statement late last Friday, Davis continued to jab at the federal regulators, issuing a prepared statement in reach to a General Accounting Office study:

"Americans deserve a vigilant regulator of wholesale prices but instead FERC has been asleep at the switch. Hopefully the GAO report requested by U.S. Reps. Peter DeFazio and Jay Inslee will spur FERC to vigorously enforce the law. If FERC doesn't do its job, Americans will be saddled with unjustifiably high prices benefiting no one but the greedy generators."

In any and all forums when he got the chance last week, the governor was strongly supporting the veracity of analyses by the state transmission grid operator, Cal-ISO, that developed an $8.887 billion estimate of overcharges from May 2000 through May of this year, although industry sources question the accuracy of the estimates.

According to Davis, the FERC administrative law judge handling the settlement proceeding has estimated the potential refunds are in the $2 to $2.5 billion range, although this may be only charges associated with FERC-jurisdictional suppliers (not government suppliers), and only dating back to Oct. 2, 2000. The Cal-ISO estimates for the full 13-month period attribute $5.4 billion to FERC-regulated suppliers, and $3.4 billion to non FERC-covered entities, such as BC Hydro, Bonneville Power Administration and the Los Angeles Department of Water and Power, all big sellers to California.

Davis similarly highlighted and stood by the three disgruntled former power plant workers at Duke Energy's South Bay plant south of San Diego in Chula Vista, appearing to support their claims that Duke manipulated the plant operations to drive prices up during power alerts. The workers were former San Diego Gas and Electric Co. workers, at a relative low level, who news media noted later last week had lodged a number of grievances during their days working at the power plant.

Cal-ISO, in its 10-page June 19 report, "Potential Overpayments Due to Market Power in California's Wholesale Energy Market," identified four principal differences that have so far caused FERC to issue orders for $125 million in refunds, while Cal-ISO maintains the overcharges by FERC-jurisdictional suppliers are around $5.4 billion:

  • FERC uses an "extremely high cost" unit as the benchmark over which prices are deemed too high (called a "monthly proxy price").
  • Sales over the monthly proxy price that are subject to refunds are limited to times of Stage Three power alerts by the Cal-ISO.
  • Sales subject to refund are further limited to deals directly made with the Cal-ISO or the now-defunct California Power Exchange.

FERC so far has not identified any refunds dating back to sales prior to Jan. 1, 2001. And in its ongoing settlement process, FERC is looking only back to Oct. 2, 2000 because it was on that date that the federal regulators issued an order making wholesale power sales in the California market subject to refund, according to Sempra's Baum.

In response to a news media question, the governor's energy adviser Nancy McFadden ruled out the possibility of the state offering immunity from future litigation as part of the settlement negotiations. The governor's advisers were unsure whether the state would be willing to drop requirements that the generators take discounts of the unpaid amounts owed them on wholesale power deals until after they see how large a refund is ordered by FERC.

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